Ernest Mandel

An Introduction to
Marxist Economic Theory

Capital in Pre-capitalist Society

Between primitive society founded on a natural economy in which production is limited to use values destined for self-consumption by their producers, and capitalist society, there stretches a long period in human history, embracing essentially all human civilizations, which came to a halt before reaching the frontiers of capitalism. Marxism defines them as societies in which small-scale commodity production prevailed. A society of this kind is already familiar with the production of commodities, of goods designed for exchange on the market and not for direct consumption by the producers, but such commodity production has not yet become generalized, as is the case in capitalist society.

In a society founded on small-scale commodity production, two kinds of economic operations are carried out. The peasants and artisans who bring their products to market wish to sell goods whose use value they themselves cannot use in order to obtain money, means of exchange, for the acquisition of other goods, whose use value is either necessary to them or deemed more important than the use value of the goods they own.

The peasant brings wheat to the marketplace which he sells for money; with this money he buys, let us say, cloth. The artisan brings his cloth to the market, which he sells for money; with this money he buys, let us say, wheat.

What we have here, then, is the operation: selling in order to buy. Commodity–Money–Commodity, C–M–C which has this essential character: the value of the two extremes in this formula is, by definition, exactly the same.

But within small-scale commodity production there appears, alongside the artisan and small peasant, another personage, who executes a different kind of economic operation. Instead of selling in order to buy, he buys in order to sell. This type of person goes to market without any commodities; he is an owner of money. Money cannot be sold; but it can be used to buy, and that is what he does: buys in order to sell, in order to resell: M–C–M’.

There is a fundamental difference between the two types of operation. The second operation makes no sense if upon its completion we are confronted by exactly the same value as we had at the beginning. No one buys a commodity in order to sell it for exactly the same price he paid for it. The operation “buy in order to sell” makes sense only if the sale brings a supplementary value, a surplus value. That is why we state here, by way of definition. M’ is greater than M and is made up of M+m; m being the surplus value, the amount of increase in the value of M.

We now define capital as a value which is increased by a surplus value, whether this occurs in the course of commodity circulation, as in the example just given, or in production, as is the case in the capitalist system. Capital, therefore, is every value which is augmented by a surplus value; it therefore exists not only in capitalist society but in any society founded on small-scale commodity production as well. For this reason it is necessary to distinguish very clearly between the life of capital and that of the capitalist mode of production, of capitalist society. Capital is far older than the capitalist mode of production. The former probably goes back some 3,000 years, whereas the latter is barely 200 years old.

What form does capital take in precapitalist society? It is basically usury capital and merchant or commercial capital. The passage from precapitalist society into capitalist society is characterized by the penetration of capital into the sphere of production. The capitalist mode of production is the first mode of production, the first form of social organization, in which capital is not limited to the sole role of an intermediary and exploiter of non-capitalist forms of production, of small-scale commodity production. In the capitalist mode of production, capital takes over the means of production and penetrates directly into production itself.

Origins of the Capitalist Mode of Production

What are the origins of the capitalist mode of production? What are the origins of capitalist society as it has developed over the past 200 years?

They lie first of all in the separation of the producers from their means of production. Subsequently, it is the establishment of these means of production as a monopoly in the hands of a single social class, the bourgeoisie. And finally, it is the appearance of another social class which has been separated from its means of production and therefore has no other resources for its subsistence than the sale of its labor-power to the class which has monopolized the means of production.

Let us consider each of these origins of the capitalist mode of production, which are at the same time the fundamental characteristics of the capitalist system as well.

First characteristic: separation of the producer from his means of production. This is the fundamental condition for existence of the capitalist system but it is also the one which is generally the most poorly understood. Let us use an ex ample which may seem paradoxical since it is taken from the early Middle Ages, which was characterized by serfdom.

We know that the mass of peasant-producers were serfs bound to the soil. But when we say that the serf was bound to the soil, we imply that the soil was also “bound” to the serf, that is, he belonged to a social class which always had a base for supplying its needs, enough land to work so that the individual serf could meet the needs of a household even though he worked with the most primitive implements. We are not viewing people condemned to death by starvation if they do not sell their labor-power. In such a society, there is no economic compulsion to hire out one’s arms, to sell one’s labor-power to a capitalist.

We can express this another way by stating that the capitalist system cannot develop in a society of this kind. This general truth also has a modern application in the way colonialists introduced capitalism into the African countries during the nineteenth and early twentieth centuries.

Let us look at the living conditions of the inhabitants in all the African countries. They were stock breeders and cultivators of the soil, on a more or less primitive basis, depending on the character of the region, but always under the condition of a relative abundance of land. Not only was there no scarcity of land in Africa, but in terms of the ratio of population to the amount of available land, it may be said that land reserves were virtually unlimited. It is true, of course, that the yield from these lands was mediocre because of the crude agricultural implements and the standard of living was very low, etc., but there was no material force pushing this population to work in the mines, on the farms or in the factories of the white colonialist. Without a transformation in the administration of land in Equatorial Africa, in Black Africa, there was no possibility for introducing the capitalist mode of production. For that, compulsion of a non-economic character had to be used, a thoroughgoing and brutal separation of the black masses from their normal means of subsistence had to be carried out. A large part of the lands had to be transformed overnight into national domains, owned by the colonizing state, or into private property belonging to capitalist corporations. The black population had to be resettled in domains, or in reserves, as they have been cynically called, in land areas which were inadequate for sustaining all their inhabitants. In addition, a head-tax, that is to say, a money tax on each inhabitant, was imposed as another lever, since primitive agriculture yielded no money income.

By these various extra-economic pressures, the colonialists created a need for the African to work for wages during perhaps two or three months a year, in order to earn the money to pay his tax and buy the small supplement of food necessary for his subsistence, since the land remaining at his disposal was no longer adequate for a livelihood.

In such countries as South Africa, the Rhodesias, and part of the former Belgian Congo, where the capitalist mode of production was introduced on a grand scale, these methods were applied on the same scale, and a large part of the black population was uprooted, expelled, and forced out of its traditional existence and mode of work.

Let us mention, in passing, the ideological hypocrisy which accompanied this movement, the complaints of the capitalist corporations that the blacks were lazy since they did not want to work even when they had a chance to make ten times as much in mines and factories as they did from their traditional labor on the land. These same complaints had been made about the Indian, Chinese and Arab workers some 50 to 70 years earlier. They were also made – a rather good proof of the basic equality of all the races which make up humanity – against the European workers, French, Belgian, English, German, in the seventeenth or eighteenth centuries. It is simply a function of this constant fact: normally, because of his physical and nervous constitution, no man cares to be confined for 8, 9, 10 or 12 hours a day in a factory, mill or mine; it really requires a most abnormal and unusual force or pressure to make a man engage in this kind of convict labor when he has not been accustomed to it.

A second origin and characteristic of the capitalist mode of production is this concentration of the means of production in monopoly form and in the hands of a single social class, the bourgeoisie. This concentration is virtually impossible unless a continual revolution is taking place in the means of production, in which the latter become increasingly complex and more costly, at least so far as the minimum means of production required for launching a big business (initial capital expenditures) are concerned.

In the guilds and trades of the Middle Ages, there was great stability in the means of production; the weaving-looms were transmitted from father to son, from generation to generation. The value of these looms was relatively small, that is to say, each journeyman could expect to get back the counter-value of these looms after a certain number of years of work. The possibility for establishing a monopoly arrived with the industrial revolution, which unleashed an uninterrupted development of increasingly complex mechanisms and concomitantly, a need for ever greater capital sums in order to start a new enterprise.

From this point on it may be said that access to the ownership of the means of production becomes impossible for the overwhelming majority of wage-earners and salaried personnel, and that such ownership became a monopoly in the hands of one social class, the class which possesses capital and capital reserves and can obtain additional capital by virtue of the single fact that it already has some of it. And by virtue of this same fact, the class without capital is condemned to remain perpetually in the same state of deprivation and consequently under the continuous compulsion to labor for somebody else.

The third origin and characteristic of capitalism: the appearance of a social class which has no possessions save its own hands and no means of subsistence other than the sale of its labor-power, but at the same time, is free to sell this labor-power and does so to the capitalist owners of the means of production. This is the appearance of the modern proletariat.

We have here three elements which combine with each other. The proletariat is the free worker; he constitutes both a step ahead and a step backwards, compared with the serf of the Middle Ages: a step ahead because the serf was not free (the serf was himself a step ahead compared with the slave) and could not move about freely; a step backwards because, in contrast with the serf, the proletarian has also been “liberated” from, that is to say, deprived of, all access to the means of production.

Origins and Definition of the Modern Proletariat

Among the direct ancestors of the modern proletariat we must include the uprooted population of the Middle Ages which was no longer bound to the soil or incorporated in the trades, corporations and guilds of the free towns, and was consequently a wandering, rootless population, which had begun to sell its labor by the day or even by the hour. There were quite a few cities in the Middle Ages, notably Florence, Venice and Bruges, where a “labor market” appeared as early as the thirteenth, fourteenth, or fifteenth centuries. These cities had a place where the poor who did not belong to any craft, were not journeymen for an artisan and had no means of subsistence, assembled and waited to be hired by some merchant or businessman for an hour, half a day, a day, etc.

Another origin of the modern proletariat, closer to us in time, lies in what has been called the disbanding of the feudal retinues. It therefore corresponds with the long and slow decline of the feudal nobility, which set in during the thirteenth and fourteenth centuries and terminated with the bourgeois revolution in France at the end of the eighteenth century. In the remote Middle Ages, there were sometimes fifty, sixty to over a hundred households living directly from the feudal lord. The number of these individual attendants began to decline, especially during the sixteenth century, which was marked by a sharp rise in prices, and as a consequence, a great impoverishment of all those social classes with fixed money incomes. The feudal lords of Western Europe were also hard hit because most of them had converted rent in kind into money rent. One of the results of this impoverishment was a massive discharge of a substantial section of the feudal retinues. In this way thousands of former valets, servants, and clerks to the nobles became wanderers, beggars, etc.

A third origin of the modern proletariat comes from the expulsion of a part of the peasantry from its lands as a result of the transformation of these agricultural lands into grass-lands. The great English Utopian socialist Thomas More advanced this magnificent formula as far back as the sixteenth century: “Sheep have eaten men”; in other words, the transformation of fields into grasslands for grazing sheep, as a result of the development of the wool industry, threw thousands upon thousands of English peasants off their lands and condemned them to starvation.

There is still a fourth origin of the modern proletariat, one which played a somewhat lesser role in Western Europe but an enormous one in Central and Eastern Europe, Asia, Latin America and North Africa: it is the destruction of the former artisans in the competitive struggle between the handicrafts and modern industry as the latter made its way into these underdeveloped countries from the outside.

In summary, the capitalist mode of production is a regime in which the means of production have become a monopoly in the hands of a social class and in which the producers, separated from these means of production, are free but are deprived of all means of subsistence and consequently must sell their labor-power to the owners of these means of production in order to subsist.

What is characteristic of the proletarian therefore is not the level of his wage, whether this be high or low, but primarily the fact that he has been cut off from his means of production, or that his income is insufficient for him to work for his own account.

In order to learn whether the proletarian condition is on the road to disappearing or whether, on the contrary, it is on the road of expansion, it is not so much the average wage of the worker or the average salary of the clerk which we must examine, but this wage or salary as compared with his average consumption; in other words, we must look into his possibilities for savings and compare them with the expenses of setting up an independent enterprise. If we determine that each worker, each clerk, can, after ten years of work, put aside a pile of savings which would allow him to purchase a store or small workshop, then we might say that the proletarian condition is regressive and that we live in a society in which property in the means of production is spreading and becoming generalized.

If we find, however, that the overwhelming majority of workers, manual, white-collar and governmental, remain the same poor fellows after a life of labor that they were before, in other words with no savings or not enough capital to buy means of production, we may conclude that the proletarian condition has become generalized rather than contracted, and that it is far more prevalent today than it was 50 years ago. When we examine statistics on the social structure of the United States, for example, we can see that over the past 60 years, there has been an uninterrupted decrease every five years in the percentage of the active American population working for its own account and classified as businessmen or working in a family business, whereas the percentage of this same population which is compelled to sell its labor-power has steadily increased.

Moreover, if we examine the statistics on the distribution of private wealth, we find that the overwhelming majority of workers, we may say 95 per cent, and the very great majority of white-collar workers (80 or 85 per cent) are not even able to amass petty sums, small capitals; in other words, these groups expend their entire incomes. Fortunes are in reality limited to a very small fraction of the population. In most capitalist countries, 1%, 2%, 2.5%, 3.5% or 5% of the population possess 40%, 50%, 60% of the private wealth of the country, the balance being in the hands of 20% or 25% of this same population. The first category of possessors is the big bourgeoisie; the second category is the middle and petty bourgeoisie. And all those who are outside these categories own nothing but consumer goods (sometimes including their housing).

When honestly compiled, statistics on estate duties and inheritance taxes are very revealing on this subject.

A specific study made by the Brookings Institute (a source above any suspicion of Marxism) for the New York Stock Exchange reveals that only one or two per cent of workers own stocks and further that this “ownership” averages about $1,000 worth.

Virtually all capital is therefore in the hands of the bourgeoisie and this reveals the self-reproductive character of the capitalist system: those who possess capital keep on accumulating more and more; those who do not possess it rarely can acquire it. In this way the division in society is perpetuated in a possessing class and a class compelled to sell its labor-power. The price for this labor-power, the wage, is virtually consumed in toto, whereas the possessing class has a capital constantly increasing from surplus value. Society’s enrichment in capital therefore takes place, so to speak, for the exclusive profit of a single social class, namely, the capitalist class.

The Fundamental Mechanism of Capitalist Economy

And now what is the functioning basis of this capitalist society?

If you were to go to the Printed Cottons Exchange on a certain day, you would not know whether there was exactly enough, or too little, or too much printed cottons, measured against the existing needs in France at that moment. You would only find that out after a certain time: that is to say, if there were overproduction and a part of production unsaleable, you would see prices fall. If there were, on the contrary, a scarcity, you would see prices rise. The movement of prices is the thermometer telling us whether there is a scarcity or plethora. And since it is only after the event that we find out whether the quantity of labor expended in an industrial branch has been expended in a socially necessary way or whether part of it has been wasted, it is only after the event that we are able to determine the exact value of a commodity. This value, therefore, is, if you choose to call it so, an abstraction; but it is a real constant around which prices fluctuate.

What causes the movement in these prices and consequently, in longer terms, the movement in these values, in this labor productivity, in this production and in this overall economic life?

What makes Sammy run? What causes capitalist society to move? Competition. Without competition there is no capitalist society. A society where competition is radically or completely eliminated would no longer be capitalist to the extent that there would no longer be a major economic motive for accumulating capital and consequently for carrying out nine tenths of the economic operations which capitalists execute.

And what is the basis of competition? Two ideas are basic to it but these do not necessarily overlap. First is the idea of the unlimited market, the market without restrictions, without exact boundaries. Then there is the idea of a multiplicity of decision centers, above all in matters of investment and production.

If all production in a given industrial sector were concentrated in the hands of a single capitalist firm, competition would still not be eliminated, because an unlimited market would still exist and there would still be a competitive struggle between this industrial sector and other sectors to capture as much of this market as possible. Furthermore, there would always be a possibility that a foreign competitor might enter the scene and provide new competition right in the very same sector.

The reverse is also true. If we can conceive a totally and completely limited market, but one in which a great number of enterprises are righting to capture a part of this limited market, then competition must obviously survive.

Therefore only if these two phenomena were to be suppressed simultaneously, that is to say, if there were only one producer for all commodities and the market became absolutely stable, frozen and without any capacity for expansion, could competition disappear completely.

The appearance of the unlimited market displays all of its significance when compared with the period of small-scale commodity production. A guild in the Middle Ages generally worked for a market limited to the city and its immediate suburbs, and in accordance with fixed and specific labor techniques.

The historical passage of the limited market to the unlimited market is illustrated by the example of the “new clothiers” of the countryside which replaced the old city clothiers in the fifteenth century. There were now cloth manufacturers without guild regulations, without production limits, therefore without any market restrictions, who tried to infiltrate everywhere, seek clients everywhere, and not only went beyond the immediate area of their production centers, but even tried to organize an export trade to very distant countries. On the other hand, the great commercial revolution of the sixteenth century stimulated a relative reduction in the prices of a whole set of products which had been considered great luxuries in the Middle Ages and were only within the purchasing range of a small part of the population. These products suddenly became far less expensive, and even came within the reach of a significant part of the population. The most striking example of this trend is sugar, which has become a commonplace product today and is undoubtedly to be found in every working-class household in France or in Europe; in the fifteenth century, however, it was still a highly luxurious article.

The apologists for capitalism have always pointed to the reduction in prices and widened market for a whole set of products as the benefits brought about by this system. This argument is true. It is one of the aspects of what Marx called “the civilizing mission of Capital.” To be sure we are concerned here with a dialectical but real phenomenon where the value of labor-power has a tendency to fall by virtue of the fact that capitalist industry produces the commodity equivalent of wages with ever increasing rapidity while it simultaneously has a tendency to rise by virtue of the fact that this value of labor-power progressively takes in the value of a whole series of commodities which have become mass consumer goods, whereas formerly they were reserved for a very small part of the population.

Basically, the entire history of trade between the sixteenth and twentieth century is the history of a progressive transformation from trade in luxury goods into trade in mass consumer goods; into trade in goods destined for an ever increasing portion of the population. It is only with the development of the railroads, of the means for fast navigation, of telegraphy, etc., that it became possible for the whole world to be marshalled into a real potential market for each great capitalist producer.

The idea of an unlimited market does not, therefore, merely imply geographic expansion, but economic expansion, available purchasing power, also. To take a recent example: the extraordinary rise in the production of durable consumer goods in world capitalist production during the past fifteen years was not at all due to any geographic expansion of the capitalist market; on the contrary, it was accompanied by a geographic reduction in the capitalist market, since a whole series of countries were lost to it during this period. There are few, if any, automobiles of French, Italian, German, British, Japanese or American manufacture exported to the Soviet Union, China, North Vietnam, Cuba, North Korea, or the countries of East Europe. Nevertheless, this expansion did take place, thanks to the fact that a much greater fraction of the available purchasing power, which had increased absolutely as well, was used for buying these durable consumer goods.

It is no accident that this expansion has been accompanied by a more or less permanent agricultural crisis in industrially advanced countries, where the consumption of a whole group of agricultural products has not only ceased to increase on a relative basis but is even beginning to show an absolute decline: for example, the consumption of bread, potatoes, and of commonplace fruits like apples, pears, etc.

Production for an unlimited market, under competitive conditions, results in increased production, for an increase in production permits a reduction in costs and affords the means for beating a competitor by underselling him.

If we look at the long-term change in the value of all commodities which are produced on a large scale in the capitalist world, there can be no doubt that their value has declined considerably. A dress, knife, pair of shoes, or schoolboy’s notebook today has a value in hours and minutes of labor which is far lower than it was fifty or a hundred years ago.

Obviously real production values must be compared and not sale prices, which include either enormous distribution and sales expenses or swollen monopolistic superprofits. Using gasoline as an example, especially the gasoline distributed in Europe and originating in the Middle East, we find that its production costs are very low, barely 10 percent of the sale price.

In any event, there can be no doubt about the fact that this drop in value has actually taken place. Growth in labor productivity means a reduction in the value of goods, since the latter are manufactured with an ever reduced quantity of labor-time. Therein lies the practical tool which capitalism possesses for enlarging its markets and defeating its competitors.

What practical method does the capitalist have for sharply cutting his production costs and simultaneously sharply increasing his production? It is the development of mechanization, the development of means of production, mechanical instruments of labor of ever increasing complexity, originally powered by steam power, then by gasoline or diesel oil, and finally by electricity.

The Growth in the Organic Composition of Capital

All capitalist production can be represented in value by the formula: C+V+S. The value of every commodity consists of two parts: one part represents crystallized or conserved value and the other newly created value. Labor-power has a dual function, a dual use value: that of preserving all existing values in the instruments of labor, machines, buildings, while incorporating a fraction of this value into current production; and that of creating a new value, which contains surplus value, profit, as one of its components. Another part of this new value goes to the worker, and represents the counter-value of his wage. The surplus value portion is appropriated by the capitalist without any counter-value.

We call the equivalent of wages variable capital and designate it by V. Why is it capital? Because, in effect, the capitalist advances this value; it constitutes, therefore, a part of his capital, which is expended before the value of the commodities produced by the workers in-question can be realized.

We call that part of capital which is transformed into machines, buildings, raw materials, etc., whose value is not increased by production but merely preserved by it, constant capital and designate it by C. The part of capital called variable capital, V, the part used by the capitalist to buy labor-power, is so termed because it is the only part of capital which lets the capitalist increase his capital by means of a surplus value.

Since this is the case, what is the economic logic of competition, of the drive to increase productivity, to increase mechanical means, machine labor? The logic of this drive, that is to say, the fundamental tendency of the capitalist system, is to increase the weight of C the weight of constant capital, with respect to variable capital. In the fraction C/V, C tends to increase, that is to say, the part of total capital made up by machines and raw materials, but not in wages, tends to increase with the advances in mechanization and wherever competition compels capitalism to step up labor productivity.

We call this fraction C/V the organic composition of capital: it is therefore the ratio between constant capital and variable capital, and we say that in the capitalist system this organic composition has a rising tendency.

How can the capitalist acquire new machines? What is the meaning of the statement that constant capital keeps on increasing?

The fundamental operation of capitalist economy is the production of surplus value. But so long as the surplus value has merely been produced, it remains locked in the commodities and the capitalist cannot use it; unsold shoes cannot be transformed into new machines, into greater productivity. In order to be able to buy new machines, the industrialist possessing shoes must sell these shoes, and a part of the proceeds of this sale can then serve to purchase new machines, as a supplementary constant capital.

Expressed another way: realizing surplus value is the necessary condition for the accumulation of capital, and capital accumulation is simply the capitalization of surplus value.

Realizing surplus value means the sale of goods but also the sale of such goods under conditions where the surplus value they contain can actually be realized in the market. All businesses operating at average productivity in society – whose total production therefore corresponds with socially necessary labor – are supposed to realize the total value and surplus value produced in their plants, neither more nor less, when their goods are sold. We saw previously that those enterprises which are above the average in their productivity will capture a part of the surplus value produced in other enterprises, whereas those operating at a lower than average productivity will not realize a part of the surplus value produced in their plants but must surrender it to other plants which are technologically ahead of them. Consequently, the realization of surplus value means the sale of goods under conditions in which all of the surplus value produced by the workers in a plant manufacturing commodities is actually paid for by their purchasers.

As soon as the stock of goods produced in a given period is sold, the capitalist is reimbursed with a sum of money which constitutes the counter-value of the constant capital expended in achieving this production, that is to say, the raw materials used together with the fraction of the value of machines and goods amortized by this production. He has also been reimbursed with the counter-value of wages which he advanced in order to effect this production. In addition, he is in possession of the surplus value produced by his workers.

What happens to this surplus value? A part of it is unproductively consumed by the capitalist, for the poor fellow has to live, has to keep his family alive together with his entourage; and everything he spends for these purposes is completely withdrawn from the process of production.

A second part of the surplus value is accumulated and is utilized by being transformed into capital. Accumulated surplus value is, consequently, that entire part of surplus value which is not unproductively consumed in meeting the private needs of the ruling class, and which is transformed into capital, either into supplementary constant capital, that is to say, into a supplementary quantity (more exactly: a value) of raw rnaterials, machines, buildings; or into supplementary variable capital, that is to say, means for hiring more workers.

We now understand why the accumulation of capital is the capitalization of surplus value, that is to say, the transformation of a large part of surplus value into supplementary capital. And we also understand how the process of growth in the organic composition of capital represents an uninterrupted succession of capitalization processes, that is to say, of the production of surplus value by workers and its transformation by the capitalists into supplementary buildings, machines, raw materials and workers.

It is consequently inaccurate to say that it is the capitalist who creates employment, since it is the worker who produced the surplus value, which was capitalized by the capitalist, and used, among other things, for hiring more workers. In reality, the entire mass of fixed wealth we see in the world, the whole mass of plants, machines, roads, railroads, ports, hangars, etc., etc., all of this enormous mass of wealth is nothing but the materialization of a mass of surplus value created by the workers, of non-reimbursed labor which was transformed into private property, into capital for the capitalists. It is, in other words, a colossal proof of the continuous exploitation undergone by the working class since the origin of capitalist society.

Do all capitalists progressively add machines, increase their constant capital and the organic composition of their capital? No, the increase in the organic composition of capital takes Place antagonistically, by way of a competitive struggle governed by that law which the great Flemish painter, Peter Breughel, portrayed in an engraving: the big fish eat the little.

The competitive struggle is therefore accompanied by a continuous concentration of capital by the displacement of a large number of businessmen by a smaller number, and by the transformation of a certain number of independent business people into technicians, managers, foremen, and even simple subordinate office personnel and workers.

Competition Leads to Concentration and Monopoly

The concentration of capital is another permanent law of capitalist society and is accompanied by the proletarianization of a part of the bourgeois class, the expropriation of a certain number of bourgeois by a smaller number of bourgeois. That is why the Communist Manifesto of Marx and Engels emphasizes the fact that capitalism, which claims to defend private property, is in reality a destroyer of this private property, and carries out a constant, permanent expropriation of a great number of proprietors by a relatively small number of proprietors. There are several industrial branches in which this concentration is particularly striking: coal mining had hundreds of companies during the nineteenth century in a country like France (there were almost two hundred in Belgium); the automobile industry had a hundred or more firms at the beginning of the century in countries like the United States and England, whereas today their number has been reduced to four, five or six such companies at most.

Of course, there are industries where this concentration has not been carried so far, such as the textile industry, the food industry, etc. In general, the greater the organic composition of capital in an industrial branch, the greater is the concentration of capital, and conversely, the smaller the organic composition of capital, the smaller is the concentration of capital. Why? Because the smaller the organic composition of capital, the less capital is required at the beginning in order to enter this branch and establish a new venture. It is far easier to put together the million or two million dollars necessary for building a new textile plant than to assemble the hundreds of millions needed to set up even relatively small steel works.

Capitalism was born of free competition and is inconceivable without competition. But free competition produces concentration and concentration produces the opposite of free competition, namely, monopoly. Where there are few producers, they can readily reach agreements, at the expense of the consumers, in dividing up markets and preventing any lowering of prices.

So in the span of a century, the whole capitalist dynamic appears to have changed its nature. First we have a movement proceeding in the direction of a constant fall in prices because of a constant rise in production and a constant multiplication of the number of enterprises. At a certain point, the sharpening of competition brings with it a concentration of enterprises and a reduction in the number of enterprises. The remaining companies are now able to reach agreement on preventing further price reductions and such agreement can only be honored, of course, by limiting production. The era of monopoly capitalism thus displaces the era of free competitive capitalism at the beginning of the last quarter of the nineteenth century.

Naturally, when we speak of monopoly capitalism, we must not in the least presume a capitalism which has completely eliminated competition. There is no such thing. We simply mean a capitalism whose basic behavior has changed, that is to say, it no longer strives for a constant lowering of prices by means of a constant increase in production; it uses the technique of dividing up the market, of setting up market quotas. But this process winds up in a paradox. Why do capitalists who began as competitors now turn to concerted action in order to limit this competition and to limit production as well? The answer is that it is a method of increasing their profits. They only do so if it brings them more profits. Limiting production permits increasing prices, bringing greater profits and consequently increased capital accumulation.

This new capital can no longer be invested in the same branch, since this would mean an increase in productive capacity, resulting in increased production, and leading to a lowering of prices. Capitalism has been caught up in this contradiction commencing with the last quarter of the nineteenth century. It then suddenly acquired a quality which only Marx had foreseen and which was not grasped by economists like Ricardo or Adam Smith; suddenly, the capitalist mode of production took on a missionary role. It began to spread throughout the world by means of capital exports, which enabled capitalist enterprises to be set up in countries or sectors where monopolies had not yet entrenched themselves.

The consequence of monopoly in certain branches and of the spread of monopoly capitalism in certain countries is that the capitalist mode of production has been reproduced in branches still free from monopoly control and in countries which had not yet become capitalist. This is how colonialism in all its varieties managed, toward the beginning of the twentieth century to spread like a powder train in the course of a few decades, starting from the small part of the world to which the capitalist mode of production was limited, and eventually embracing the whole world. Every country on the map was thus transformed into a sphere of influence and field of investment for capital.

Tendency of the Average Rate of Profit to Decline

We saw previously that the surplus value produced by the workers in each factory remained “locked” in the products, and that the question whether or not this surplus value would be realized by the capitalist factory owner was decided by market conditions, that is to say, by the possibility for the factory to sell its products at a price which would allow all of this surplus value to be realized. By applying the law of value developed earlier, we can set up the following rule: all enterprises which are producing at the average level of productivity will, roughly speaking, realize the surplus value produced by their workers, that is to say, they will sell their products at a price equal to the value of these products.

But this will not be the case for two categories of enterprises: those operating below and those operating above the average level of productivity.

What is the category of enterprises operating below the average level of productivity? This is nothing but a generalization of the lazy shoemaker we mentioned previously. It is, for example, a steel mill which produces 500,000 tons of steel in 2.2 or 2.5 or 3 million man-hours, when the national average for this production is 2 million man-hours. It is therefore wasting social labor-time. The surplus value produced by the workers in this factory will not be realized in its entirety by the owners of this plant; it will work at a profit below the average rate of profit for all enterprises in the country.

But the total mass of surplus value produced in society is a fixed mass, dependent in the last analysis on the total number of labor hours supplied by all workers engaged in production. This means that if there are a certain number of enterprises which do not realize all the surplus value produced by their workers because the enterprises are operating below the average level of productivity and have therefore wasted social labor-time, then there is an unexpended balance of surplus value available which is captured by the plants operating above the average level of productivity. Having economize on social labor-time, the latter are rewarded by society.

This theoretical explanation is a general demonstration of the mechanism determining the movement of prices in capitalist society. How does this mechanism operate in practice?

Let us say the average selling price of a locomotive is a million dollars. What then will be the difference between a plant operating below the average productivity of labor and one operating above it? The first will spend, let us say, $900,000 to produce a locomotive, and its profit will be $100,000. On the other hand, the plant producing above the average level of labor productivity, will spend, let us say, $750,000 and will make $250,000 profit, that is 33 per cent on its current production, whereas the average rate of profit is 18 per cent and enterprises working at this average social labor productivity produced locomotives at a cost of $850,000, realizing $150,000 in profit, that is to say, 18 per cent.

In other words, capitalist competition favors those enterprises which are technologically ahead; these enterprises realize superprofits as compared with the average profit. Average profit is basically an abstract idea, exactly like value. It is an average around which the real profit rates of different branches and enterprises fluctuate. Capital flows toward the branches where there are superprofits and flows away from those branches in which profits are below the average. By virtue of this ebb and flow of capital from one branch to another, the rates of profit tend to approximate this average, without ever completely reaching it in an absolute and mechanical way.

This is the way then that equalization of the rates of profit is effected. There is a very simple way to determine this abstract average rate of profit: we take the total mass of surplus value produced by all workers in a given year and in a given country, and draw its ratio to the total mass of capital investment in that country.

What is the formula for the rate of profit? It is the ratio between surplus value and total capital. It is therefore S/(C+V) Still another formula must be considered as well: this is the rate of surplus value, or better still, the rate of exploitation of the working class. It specifies the way in which the newly produced value is divided between workers and capitalists. If, for instance, S/V equals 100 per cent this means that the newly produced value is divided into two equal parts, one part going to the workers in the form of wages, the other going to the bourgeois class in the form of profits, interest, dividends, etc.

When the exploitation rate of the working class is 100 per cent, the 8-hour working day then consists of two equal parts: 4 hours of labor in which the workers produce the counter-value of their wages, and 4 hours in which they supply gratuitous labor, labor which is not paid for by the capitalists and its product appropriated by the latter.

At first sight, it seems that if the organic composition of capital C/V increases, the profit rate S/(C+V) will decline, since C becomes increasingly greater relative to V, and S is a product of V and not of C. But there is a factor that can neutralize the effect of an increase in the organic composition of capital: it is precisely an increase in the surplus value rate.

If S over V, the surplus value rate increases, this means that in the fraction S/(C+V), both the numerator and denominator increase, and in this case the value of the fraction can remain the same, under conditions where the two increases occur in a certain proportion.

In other words, an increase in the surplus value rate can neutralize the effects of an increase in the organic composition of capital. Let us assume that the value of production C+V+S goes from 100C+100V+100S to 20OC+10OV+100S. The organic composition of capital will therefore go from 100 to 200 per cent, the profit rate will fall from 50 to 33 per cent. But if at the same time the surplus value goes from 100 to 150, that is to say, the surplus value rate goes from 100 to 150 per cent, then the profit rate 150/300 remains at 50 per cent: the increase in the surplus value rate neutralizes the effect of the increase in the organic composition of capital.

Can these two movements occur in exactly the necessary proportions for them to neutralize each other? Here we touch the basic weakness, the Achilles heel of the capitalist system. These two movements cannot develop proportionally over the long run. There is no limit whatever to the increase in the organic composition of capital. For V there is a theoretical limit of zero, assuming the arrival of total automation. But can S/V also increase in an unlimited way, without any limit whatever? No, for in order to produce surplus value it is necessary to have working workers, and this being the case, the fraction of the workday in which the worker reproduces his own wage cannot fall to zero. It can be reduced from 8 hours to 7, from 7 hours to 6, from 6 hours to 5, from 5 hours to 4, from 4 hours to 3, from 3 hours to 2, from 2 hours to 1, from 1 hour to 50 minutes. It would already be a fantastic productivity which would permit the worker to produce the counter-value of his entire wage in 50 minutes. But he could never reproduce the counter-value of his wage in zero minutes and zero seconds. There is a residual which capitalist exploitation can never suppress.

This means that in the long run the fall in the average rate of profit is inevitable, and I personally believe, contrary to the idea of quite a few Marxists, that this fall is also demonstrable in statistics, that is to say that the average rates of profit today in the big capitalist countries are much lower than they were 50, 100 or 150 years ago.

Of course, if we examine shorter periods, there are fluctuations up and down; there are numerous factors which come into play (we will discuss them later, when dealing with neocapitalism). But for the long run, the movement is very clear, both for interest rates and profit rates. We should point out, moreover, that among all the developmental tendencies of capitalism, this was the one most clearly perceived by the theoreticians of capitalism themselves. Ricardo speaks of it; John Stuart Mill stresses it; Keynes is highly aware of it. There was a maxim in England at the end of the nineteenth century which was practically a popular saying: capitalism can withstand anything except a fall in the average interest rate to 2 per cent, because that would kill investment incentive.

This maxim obviously contains a certain kind of error in its reasoning. Calculations of percentages, of profit rates, have a real value, but it is still, after all, a relative one to a capitalist. What interests him is not exclusively the percentage he makes on his capital, but also the total amount which he makes. And if the 2 per cent applies not to $100,000 but to $100 million, it still represents $2 million, and the capitalist would do an awful lot of thinking before he would say that he preferred to let his capital lie idle rather than to accept the revolting profit of a mere $2 million a year.

In practice, we see therefore that there is no total halt in investment activity following a fall in the profit and interest rates but rather a slowing down proportional to the fall in profit rate in an industrial branch. On the other hand, when there is more rapid expansion and a rising tendency of the profit rate in certain industrial branches or in certain periods, then investment activity resumes, speeds up, the movement then seems to feed on itself, and the expansion appears to have no limits up to the time when the tendency reverses once more.

The Fundamental Contradiction in the Capitalist System and the Periodic Crises of Overproduction

Capitalism has the tendency to extend production without limits, to extend its arena of activity over the whole world, to view all human beings as potential customers. (Parenthetically, there is a pretty contradiction worth stressing, one which Marx already mentioned: each capitalist always likes to see other capitalists increase the wages of their workers, because the wages of those workers are purchasing power for the goods of the capitalist in question. But he cannot allow the wages of his own workers to increase, for this would obviously reduce his own profit.)

The world is consequently structured in a most extraordinary way, having become an economic unit with an interdependence of its different parts which is extremely sensitive. You know all the cliches which have been used to depict this: if someone sneezes on the New York Stock Exchange, 10,000 peasants are ruined in Malaya.

Capitalism produces an extraordinary interdependence in incomes and a unification in tastes for all human beings. Man has suddenly become conscious of the wealth of human possibilities, whereas in pre-capitalist society, he was enclosed in the narrow natural possibilities of a single region. In the Middle Ages, pineapples were not eaten in Europe, only locally grown fruits, but today we eat fruits which may have been produced anywhere in the world and are even beginning to eat fruits from China and India which we were not accustomed to eating prior to the second world war.

There are consequently mutual links being established among products and among men. Expressed in other terms, there is a progressive socialization of all economic life, which is becoming a single assemblage, a single fabric. But this whole movement of interdependence is simply centered in an insane way around private property, private appropriation, by a small number of capitalists whose private interests, moreover, collide more and more with the interests of the billions of human beings included in this assemblage.

It is in the economic crises that the contradiction between the progressive socialization of production and the private appropriation which serves as its driving power and its support, breaks out in the most extraordinary way. For capitalist economic crises are incredible phenomena like nothing ever seen before. They are not crises of scarcity, like all pre-capitalist crises; they are crises of overproduction. The unemployed die of hunger not because there is too little to eat but because there is relatively too great a supply of foodstuffs.

At first sight the thing seems incomprehensible. How can anyone die because there is a surplus of food, because there is a surplus of goods? But the mechanism of the capitalist system makes this seeming paradox understandable. Goods which do not find buyers not only do not realize their surplus value but they do not even return their invested capital. The slump in sales therefore forces businessmen to suspend their operations. They are therefore forced to lay off their workers and since the laid-off workers have no reserves, since they can subsist only when they are selling their labor-power, unemployment obviously condemns them to the starkest poverty and precisely because the relative abundance of goods has resulted in a slump in sales.

The factor of periodic economic crises is inherent in the capitalist system and remains insurmountable. We shall see further on that this remains equally true in the neocapitalist regime in which we are now living, even if these crises are now called “recessions.” Crises are the clearest manifestation of the fundamental contradiction in the system and a periodic reminder that it is condemned to die sooner or later. But it will never die automatically. It will always be necessary to give it a conscious little push to effect its demise, and it is our job, the job of the working-class movement, to do the pushing.